Benjamin Graham, the father of value investing and mentor of Warren Buffett, famously said:
"In the short run, the market is a voting machine but in the long run, it is a weighing machine."
His distinction is a somewhat simple one at face value.
He believed the short-termism of the market was driven by investor psychology more than fundamental value investing principles.
This herd mentality means the market's outlook for certain sectors and companies will swing from euphoria to depression and back again, taking share prices along for the ride.
Over the long pole, however, the market will revert to focus on the fundamentals of the business. That's why many dyed-in-the-wool value investors will often hold a portfolio of stocks which outsiders may think are contrarian.
Unfortunately, holding out-of-favour stocks is an unpopular pastime and, therefore, is unlikely to make you the life of your next cocktail party.
Nonetheless, provided you are truly prudent in your deep value analysis of such opportunities, there significant gains to be made.
1 uber-compelling reason to watch Woolworths Limited (ASX: WOW) shares
Bearing in mind the above, I believe now is a great time to be running the ruler over Woolworths' shares.
After all, everyone knows it faces growing competition from Coles and Aldi – that started 10 years ago.
Everyone knows the Masters Home Improvement business is not yet profitable.
And everyone knows it's still searching for a CEO to replace the outgoing Grant O'Brien.
Bottom line: Everyone knows Woolworths has work to do in the short-term.
A word from Howard Marks
Since I was inspired to write this article after reading Howard Marks' latest memo, It's not Easy, I think this passage from the memo is paramount in the discussion of Woolies:
"Superior investors know – and buy – when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don't see its merit. Yogi Berra is famous for having said, 'Nobody goes to that restaurant anymore; it's too crowded'. It's just as nonsensical to say, 'Everyone realizes that investment's a bargain'. If everyone realizes it, they'll have bought, in which case the price will no longer be low."
Should you buy, hold or sell Woolworths?
Of course, Marks' framework is psychologically reassuring. However, it's individual investors who must go the next step towards unearthing bargain opportunities in the market and following through with conviction.
In my opinion, Woolworths is not yet in the 'bargain zone' so to speak. While – undoubtedly – I believe its shares are good value right now, with the looming resignation of its CEO, I'd advise investors exercise a little patience before buying in. However, it's certainly worthy of a spot at the top of your watchlist.
